Private Account Management Services
Newsletter Issued 03-20-03:
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw

Position overview . . .

Our previous newsletter, dated February 13th, forecasted that the DOW would perform a bear market rally with an anticipated trading range between 7,600 and 8,850. We further stated that the true market direction for the DOW would be readily apparent once the geopolitical events had been clearly defined. The timely release of the newsletter on February 13th represented the low for the month at 7,628 and a subsequent 400 point rally. However, the rally was less than anticipated and the intra-day high occurred earlier in the month on February 3rd at 8,152. The continued uncertainties with the various geopolitical events hampered the expected rally within the DOW and the other major indices. We further projected that the US dollar would perform a countertrend rally from it’s euro fx level of $1.09 and stated that it may have begun on February 7th. This proved to be accurate, however, the rally within the month was limited to euro fx $1.0680 with a subsequent narrow trading range. We anticipated that the US treasuries would “reflate” and decline over the next 30 to 90 days due to the negative real fed-funds rate relative to the current level of inflation and rising commodity prices. However, due to the continued geopolitical uncertainties, the US treasuries continued to gradually ascend during the course of the month. The abnormality of the geopolitical events produced the unexpected ascension with the US treasuries being purchased due to a flight-to-safety.

Looking forward . . .
We would normally release the monthly newsletter in the second week, however, delayed the publication until the commencement of the War with Iraq. We now feel that the true underlining strength or weakness of the US economy will become readily visible with the beginning of the War. This renewed transparency should show that the US economy still remains very weak. We, therefore, estimate that the annualized US Gross Domestic Product (GDP) growth to remain slightly positive at 0.7% for the next 3 to 6 months and possibly longer.

We are projecting that the DOW has resumed its bearish trend today and are expecting a trading range this month between 7,500 and 8,350. We would suggest that investors liquidate the small stock allocation recommended within the previous newsletter due to the limited stock price appreciation potential. The War with Iraq could be prolonged and will put pressure on the various stock indices and continue to hamper US consumer and corporate confidence levels. This will effect future levels of personal and corporate projection expenditures and US growth at least in the near-term.

The US dollar has completed the projected bear market rally to euro fx $1.05, even though it occurred earlier this month. We are now anticipating that the US dollar will decline to euro fx $1.09 with a possibility of seeing euro fx $1.10. The US current-account deficit still remains near 5% of the our GDP, and, am therefore, still looking for a decline within the US dollar to reduce or eliminate the imbalance. A weaker US dollar will make US purchases more affordable to foreigners and enhance the level of GDP growth.

We feel the “reflation” scenario of declining bond prices and rising yields will materialize; however, in the near-term, we are projecting the US treasuries to continue its flight-to-safety rally. Therefore, we are suggesting that investors purchase short and medium-term maturity bonds (STRIPS) to lock-in an effective yield of 3.5% for the next 30 to 90 days. This is further explained within the investment allocations section of this newsletter since we are still retaining the TIPS positions, just at a reduce percentage. We will suggest liquidating the bonds (STRIPS) once we are convinced that the rally is completed and are anticipating a decline in bond prices.


The so-called “breakpoint” settlement may have a more immediate dollar impact, but fee transparency has a broader reach of 95 million Americans who own mutual funds. We will explain breakpoint later on, but will address the fee issue first.

Mutual fund fees have risen. A study commissioned by Congress showed expenses for stock mutual funds increased in recent years, while fees for bond funds have declined. The study found that stock fund expenses totaled 0.7% in 2001, up from 0.65% in 1998, but down from 0.73% in 1990. Average expense ratios for large bond funds declined to 0.53% in 2001 from 0.61% in 1990.

This inversion is partly because of stock-portfolio values have collapsed and money flowed out of equity funds. Redemption’s from stock funds are averaging around $2 billion per week now, while assets in bond funds just topped $1 trillion.

There are a number of items that should be disclosed in a mutual fund’s total price tag, since there is a lot more than just a sales load:

1.) Commission Costs: Commission cost per average net assets is a simply calculation, which fund could report in the financial highlights table or prospectus, at virtually no additional costs. A few mutual fund tried to disclose this in its prospectus in plain English, but the SEC made them delete it because no one else was doing it. Obviously, it is only beneficial if all mutual funds disclose the same information.

2.) Soft-Dollar commissions: Soft-Dollars are the one of the worst undisclosed “conflicts of interest” in the mutual fund industry. The term refers to the various deals negotiated between brokers and advisers, whereby the broker supplies research, software and data in return for a certain volume of trading business. It is also quite common for investment consultants for public pension plans to facilitate such an arrangement with an adviser prior to recommending them as an investment manager for a portion of public pension funds. The investment consultant would simply stipulate within their arrangement that they will use a certain broker for their various research, software and data services and receive rebates from this preferred broker. The unfortunate final result is the investment consultants and/or advisers never has to disclose their received rebates to either the public pension funds or the investors because it is an “unrelated transaction.”

There are two essential problems with soft-dollars. One being, advisers and investment consultants are using these soft dollars to pay for salaries, office rent, and even vacations. The second problem is that many advisers are not taking advantage of cost-saving efficiencies in order to keep the soft-dollar spigot open. Low-cost electronic trading systems can execute many trades at one or two cents a share. But advisers and investment consultants are sticking with higher-priced trading decks, such as Merrill Lynch and Goldman Sachs, where a trade costs about five to six cents a share, to gain access to soft-dollars benefits.

The result is that there is no incentive for the adviser or the investment consultant to keep trading costs low. A corollary to soft dollars is disclosing the funds total trading costs.

A ban of soft-dollars and an increasing role of independent directors maybe a possible solution to reducing mutual fund and advisers’ true expenses.

3.) Fund marketplace costs: Those “fund supermarkets” have charges that are invisible to shareholders, in some cases up to 0.40% per year. Mutual funds and investment managers should be required to disclose the average fees they are paying to be on a supermarket shelf.

Now to “breakpoints.” The NASD, the New York Stock Exchange, and the Securities and Exchange Commission this past year issued a joint report finding overcharging at brokerage firms selling mutual funds carrying an upfront sales charge, or a “load.” Brokers are supposed to provide discounts to customers who make fund investments above a certain dollar level, or “breakpoint.” One in three investors were overcharged — at around $362 per transaction.

The long-term trend for mutual funds will be unbundled fees. That is, to separate the cost of advice from the cost of making the fund. This will allow investors to check out the merchandise, inspect the price tags and fees, and make their preferred selection.


It is important to understand that there are three(3) primary types of individuals that investors use when placing funds within the different financial investment instruments like stocks, bonds, mutual funds, life insurance, annuities, and futures/derivatives markets. They are as follows:

1.) Brokers: These are individuals that are employed by major institutions, who commonly referred to themselves as financial services representatives, financial consultants, financial planners, and estate planners. Their responsibility is to raise funds from new or existing clients and have them purchase the various investments offered by their firm, based on the clients investment profile and goals. They receive a commission percentage based on the funds applied toward the transaction, and in some cases, an overall percentage bonus based on total annualized revenues generated.

2.) Advisers: These are individuals and/or firms that, in most cases, manage an open or close-ended mutual funds or public hedge funds. They are commonly referred to as fund managers, investment managers , and investment officers. They are normally paid a salary and received annual bonuses based on the volume of commission generated transactions placed within a year. Some advisers’ bonuses are tied to performance; however, a majority have their bonuses directly associated with the amount dollars generated from the fund for various stock or bond transactions.

3.) Private Managers: These are firms like ourselves that provide private account management services for investors, which are referred to as investment managers and sometimes advisers, but with a few differences than the advisers mentioned above. This type of management service, commonly used by Private European Banks, allows the firm to never has actual access to the clients’ funds within the individual independent accounts. These firms are compensated for their services with a management fee and a percentage of new profits. All transactions are cleared through a nonaffiliated discount third-party broker at the lowest possible commission rate. There is no conflict of interest with the clients to increase the level of transactions since the firm receives no commission for executing the various transactions on the client’s behalf. This allows the firm to keep the client’s cost basis low while maximizing profits.

In summary, there is an apparent “conflict of interest” for both brokers and advisers with their incentive towards generating transactions to produce commission and/or annual bonuses for themselves. This conflicting incentive has caused mutual funds to have total annual breakevens between 6% to 17% and public hedge funds between 15% to 25%. This may not seem apparent with the data provided in the prior article, since it only defines commissions as well as fees and does not take into consideration spread profits that firms generate when executing their various transactions. The difference between the bid (the sell price) and the offer (the buy price), allows brokers and advisers to negotiate with the trading floor a lower purchase price within the spread, but show the transaction within the fund at the offer price. This, unfortunately, increases the profits for the brokers, advisers and institutions at the expense of the investors.

These high breakevens may not be readily apparent through a trending bullish stock market, but become very visible during bearish stock markets, since they add to the losses within the various mutual funds, public hedge funds, and other investment instruments. Therefore, we would suggest that investors prefer to associate with firms that have no “conflict of interest,” with the a lower cost basis, and with the same motivation of generating overall profits for their clients in either a bullish or bearish stock market.


Our allocations have changed due to the geopolitical events and the adjustments within our wave pattern technical analysis from the previous newsletter. We still believe that “reflation” will occur, but in the near-term, a flight-to-safety could continue within the US treasures. Therefore, we are suggesting a combination of zero coupon bonds (STRIPS) to capture profits with a continued rally and inflation-protection index bond (TIPS), which can generate profits as the bond market declines and yields rise. This combination is a conservative investment strategy, which will lock-in an effective yield of 3.5% as compared to a stock index fund allocation that has the risk of declining in value with a continued bearish stock market. Hence, we are suggesting the following investment allocations:

1) A 25% allocation into 2 to 5 year maturity of US Government bonds;
2) A 10% allocations into 20 to 30 year zero coupon bonds commonly referred to as STRIPS;
3) A 35% allocation into inflation-protection index bonds (TIPS). If the US treasury prices decline, this instrument will effectively generate profits as investors reposition out of bonds and back into stocks. This is far more a conservative investment vehicle than stocks or equity mutual funds and provides an effective between 4.0%-5.0% yield and possible price appreciation as the bond market declines.;
4) 0% in stock index mutual funds or large cap growth mutual funds. There is limited upside potential and a majority of stocks provide a low dividend yield with many providing none at all;
5) 15% in cash, Treasury bills, CDs or money market funds with short maturities which will allow investors to rollover these instruments and obtain a higher level of return as interest rates move higher.;
6) 15%-20% in the futures/derivatives markets (Note: This will help provide investors a means to hedge as well a further diversify their investment portfolio during either a bullish or bearish stock, bond and/or currency market as offered through our private account management services).

If there are any questions regarding the information discussed within this newsletter or our private account management services, please call the number provided below or e-mail us and we would be willing to provide further clarification.


John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400

Acknowledgments: General Accounting Office (GAO), Arthur Levitt — Former SEC Chairman, NASD, New York Stock Exchange (NYSE), Securities and Exchange Commission (SEC), John Bogle — Founder of the Vanguard Group.

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